First, contributor nations make a commitment to provide funding. This funding is in the form of “callable reserves,” which means that the contributor doesn’t actually send any money until each deal is closed. The fund is managed by the World Bank, or another MDB.
Companies sell green infrastructure projects to developing countries, and the World Bank provides matching funds.
Qualifying projects include any of those listed, so long as a design can be found so that the project is net zero and incurs no net loss to biodiversity.
The implication is that these projects become cheaper to deliver if built in the developing world, which is a nice bit of levelling-up.
In addition to the net zero requirement, other Terms and Conditions apply:
Operational profits must go to the developing country, and
Construction and operational labour should be provided locally. If that’s a problem because the skills don’t exist, then the company is responsible for provision of training and education until 90% (say) local employment is achieved
The rest of the fund allocation is used to buy (and cancel) existing (hard currency) debt from the debt owner (the bank), and to require that the bank provides an equivalent loan to the developing country, except in local currency. The repayment schedule for the new loan must be no more onerous than the one it replaces.
If the bank owns any bad or doubtful debt then it will be happy to restructure the loan in return for the removal of that bad debt from its balance sheet.
(If there are no bad or doubtful debts then the fund instead simply subsidises the restructuring of hard currency loans instead of buying the bad debt)
- G20 countries can contribute as much or as little funding as they like
- Company participation dependent on their country’s contribution
The key is that G20 countries can put in as much or as little as they like, but that Company participation in the scheme is proportional to the funding their country has provided.
The net result for the developing country is that it gets a shiny new asset for free, as well as the restructuring of hard currency debt into local currency.
The new piece of infrastructure is owned by the developing country, and it alone will benefit from the revenue generated. In addition, high value jobs will have been created (both in construction and in operation) and it is likely that the company will have to have built schools and universities in order to meet its education obligations. There is an economic boost to the companies involved in the supply chain and a reduced reliance on external currencies. The developing country can also proudly take its place as a leader in the fight against climate change and biodiversity loss.
The company has also benefited. In spite of being prevented from capturing operational earnings, it is still able to earn a profit from the construction of the infrastructure, even after the costs of providing education and complying with net zero have been taken into account. That’s because it is able to control the price it bids. Competition with other companies ensures value for money.
Because many of the risks of doing business in the developing world have been removed, the company is able to expand its market considerably. These projects will make it possible for it to diversify out of dirty industries into green, sustainable ones.
Banks are able to improve their balance sheets by eliminating bad and doubtful debt. They are able to leverage their expertise in risk management to directly benefit the fight against climate change, and they have a triple-A use for their green or sustainable bonds.
Because fund deposits are callable reserves, wealthy nations are only required to pay for projects as they actually kick off. But the best bit is that ALL of the funds they contribute end up right back in their own economy. They are effectively subsidising their own industries, with money that simultaneously counts as foreign aid.
Key for democracy is that Climate-Just Debt Swaps provide a huge lever to encourage companies to move into clean or sustainable industries, eliminating a major cause of inertia which has for so long held a brake to progress. Wealthy nations can grow their own economies at the same time as reducing global inequality and addressing climate change and biodiversity loss. Each project they authorise further helps their own economy (so long as the multiplier is above 1 – a low bar).
It is hard to imagine a scheme which can make a bigger impact on global poverty, but this scheme also puts the World Bank right in the middle of activities which directly address climate change and biodiversity loss. By relieving stresses on developing countries and directly contributing to mitigation and adaptation in the developing world, the World Bank is also making a significant impact on reducing the drivers of armed conflicts and mass migrations.
The developing world is not addressing climate change or biodiversity loss.
It’s time the wealthy nations stepped up.
2 thoughts on “The Solution”
I’m looking to support the ideas from a personal and professional perspective. I have a a professorship at Sheffield Hallam University
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